Tobacco Buyout Imputed Interest Disallows EIC

[dmj4]

Is there anything I am not aware of that provides an exception to "imputed interest" disallowing EIC? I wish there was no such thing as EIC. That being said, since there is EIC, we all have clients we feel actually deserve it more than others.

This client is a full-time farmer and pays income tax and SS every year on his farm profit. This year, due to the drought, he has less income and would qualify for EIC, BUT the "imputed interest" reported on 1099INT for 2007 from the 2005 Tobacco Buyout gives him too much investment income to get the EIC. His "imputed interest" is $1600 and he loses $1700 in EIC. He still owes even with EIC.

I am hoping there is something I don't know that keeps him from being caught in an unfortunate crack.

[Snaggletooth]

Out of Luck

Hi Donna - welcome back!

If your clients' total investment income is over $2900, he is out of luck. I don't think there is anything "magic" about the tobacco buyout than any other investment income, it's probably just a matter that this $1600 puts his total investment income over $2900.

Curious thing about the $2900, it does not "phase" out. It "locks" out. Investment income of $2899 would not impact EIC at all.

Sometimes farmers are given breaks -- for example, they alone are allowed to average income. Auditors are in general more inclined to allow losses than for Sch C filers. But I'm not aware of anything in the tobacco buyout that allows it not to tally against the $2900 ceiling. Some practitioners file the total income as capital gains and ignore the interest portion -- this is not correct, but I've known this to happen. Doesn't matter, Schedule D counts as investment income too.

You might really dig into this client and see if he sold something at a loss. This would include adult cattle if he took them to market to avoid feeding them in the drought. Of course, he would have to sell them at less than his basis, meaning this could not include any livestock raised on his place. This farmer appears to be successful, and in your part of the country, this usually means he probably relies a great deal on breeding cattle and bulls purchased elsewhere.

One more thing, if any of his "investment income" is coming from Form 4797, make sure your software is NOT including this against the $2900 ceiling. (Profit from breeding cattle taken to market because of the drought would be 4797-type income) The ceiling specifically excludes sales of business property reported on a 4797.

Welcome back, dmj4. Don't be a stranger. Snag.

[DixieEA]

agree with Snag

The farmer will get 1099 for the imputed interest, there is no way he could get EIC if 2900

DixieEA

[dmj4]

I was just hoping

I was just hoping there was something I didn't know regarding "imputed interest" not affecting the investment income for EIC calculation. It is really unfortunate because many times the full-time farming families are the ones that have the largest quotas.

I have another full-time farming family with 5 kids, the imputed interest will completely disallow thier EIC, too.

I have checked the software and used the 4797. EIC is only being disallowed because he is at $3000 of interest income; $1600+ of this is the imputed interest.

It annoys me because this was not a ploy to inflate the sales price to pay capital gains on installment sale income instead of charging interest, which I understand is the reason for imputed interest in the first place. It is simply part of what they were given for the quota, then a portion is considered as imputed interest to meet the IRS code for sales with no interest charged.

It is also a concern because the $1600 is actually more than it would have been if they had started the imputed interest in 2005 or 2006. They carried the amount for those years to 2007 reporting. If that had not happened they would not have lost their EIC, either.

Thanks for listening to my rant.

Donna

[pammie]

Food for thought

Is there anything I am not aware of that provides an exception to "imputed interest" disallowing EIC? I wish there was no such thing as EIC. That being said, since there is EIC, we all have clients we feel actually deserve it more than others.

This client is a full-time farmer and pays income tax and SS every year on his farm profit. This year, due to the drought, he has less income and would qualify for EIC, BUT the "imputed interest" reported on 1099INT for 2007 from the 2005 Tobacco Buyout gives him too much investment income to get the EIC. His "imputed interest" is $1600 and he loses $1700 in EIC. He still owes even with EIC.

I am hoping there is something I don't know that keeps him from being caught in an unfortunate crack.

It is possible that the funds originally paid to this farmer actually benefitted several individuals (other family members), but the funds were only issued to the farmer under his social security number. If this is the case, you could legitimately treat these amounts as nominee distributions (thus reducing his unearned income under the $2,900 limit) and turn around and issue appropriate 1099-INT to the applicable nominee's. Just some food for thought.

[Snaggletooth]

For Pammie

It is possible that the funds originally paid to this farmer actually benefitted several individuals (other family members), but the funds were only issued to the farmer under his social security number. If this is the case, you could legitimately treat these amounts as nominee distributions (thus reducing his unearned income under the $2,900 limit) and turn around and issue appropriate 1099-INT to the applicable nominee's. Just some food for thought.

Pammie, good thinking. Not sure it's proper or that it would survive Cir. 230 scrutiny, but excellent thinking nonetheless.

And also, there does exist the possibility (however remote in the tobacco situation) that this client is receiving money for others. In this case, the nominee treatment would be perfectly proper. An "acid test" would be if he is giving some of this money to others who are entitled to it.

Where you been? This is your first post? If you can think like this, we need you on the board more often!! Please visit again and often. We'll treat you so many ways you're bound to like some of them!!

Snaggletooth